Market down 10% - Posted by Bill Twyford

Posted by Gerald on May 23, 2006 at 12:57:22:

Exactly! Take care & have a great day.

Market down 10% - Posted by Bill Twyford

Posted by Bill Twyford on May 22, 2006 at 18:55:08:

Consider a family which bought a home for $400,000 at last year’s market top, and now for one reason or another find they have to sell: someone lost a job, got transferred, developed a chronic medical condition, etc. In many markets, they will find that the values in their neighborhood and price range have already dropped; in areas such as greater Boston, a 10% decline appears to be common.

Let’s assume that the family was one of the rare home buyers who took out a conventional mortgage, with 20% down payment in cash and a loan balance of 80%. 60% of recent home buyers have selected no down, interest-only loans.

So let’s do the math, given a 10% decline in values since they bought:

down payment: $80,000 (balance of $320,000)
Escrow and loan origination fees: $8,000 (2% of purchase price)
total mortgage: $328,000 (fees added to loan amount)
Difference between cost of renting an identical house ($1,500/month) and owning ($2,500/month): $1,000/month or $12,000 a year

(Here are the assumptions, plugged into the calculator $328,000 mortgage at 6% assumed in June 2005, payment = $1,966 /month, property taxes of 1.5% per year plus homeowners/fire insurance = $2,500/month payment)
Value of tax write-off of mortgage interest: $6,000
Net loss in owning compared to renting: $6,000

Now, on the sale:
Sale price: $360,000 (10% decline from $400,000 purchase price)
Pay-off mortgage of $324,000 from payments about $4,000 was paid off in the year of ownership), leaving cash of $36,000.
Deduct 6% realtor’s fees and closing/escrow costs of 1%: $25,000. Cash remaining: $11,000
Deduct $6,000 net loss due to owning rather than renting: cash remaining: $5,000
Value of house they qualify to buy with $5,000 down payment, assuming conventional 20% down: $25,000
Locations of homes for sale for $25,000: Northern Siberia; suburb of Chernobyl; yurt in Mongolia (must be moved with seasonal movement of herd)

Let’s be frank: this poor family which started out with a solid $80,000 and 20% down, has essentially been wiped out by a “mere” 10% decline in housing values, once actual transaction and ownership expenses are accounted for. As for those new homeowners who bought with no money down, this example shows that the transaction fees alone will drive them into bankruptcy, even if they sold the house for their original purchase price.

Thanks. Sources (if you have time…) - Posted by Drew

Posted by Drew on May 24, 2006 at 18:37:38:

Nice food for thought. If you know offhand, what were the sources for some of your assumptions? I am especially interested in credible sources for the 60% no-down statistic, and anything that supports a 10% decline in the Boston area. I told my brother that Boston could reasonably be expected to decline, and he didn’t believe me.

Where can you rent a $400,000 home for $1500 per month?

Thanks, nice job.


Re: Market down 10% - Posted by Joe

Posted by Joe on May 23, 2006 at 14:35:07:

Actually, you can buy houses for $25k in various parts of the country. And not necessarily gut-jobs either … liveable places. They probably won’t be near major metro areas though.

Although, you can buy a move-in condition mobile home for less than $10k and save the rest for the $100/mo lot rent! I’ve seen people do it, even right next to major metro areas.

So, all is not lost. But that family sure ain’t moving back into another $400k McMansion.

And $25k for a yurt? Dang, that’s an expensive yurt. Must have all the options - weather coating, moon roof, etc.

Re: Market down 10% - Posted by Eric (MI)

Posted by Eric (MI) on May 22, 2006 at 22:25:36:

I live in a perpetual down market area (Flint, Michigan area) and a 10% down turn in the market will only average $5000 or less for most of the city (I am focusing on areas outside of this area).

Luckily for the vast majority of buyers they will probably end up living in the house long enough to survive the down turn and experience the up turn again. For those unfortunate to be in the situation you described however is very unfortunate.

Homeownership, for the most part, tends to be a long term commitment so I don’t see it being that big of a problem for most people. Now people who where possibly speculating or going in over their heads hoping to sell in the short term for huge profits will be screwed, for lack of a better term.

Re: Market down 10% - Posted by Norma L. Powers

Posted by Norma L. Powers on May 22, 2006 at 22:02:07:

That’s brilliant, Bill! If I buy your course, can I learn to figure stuff like that out for myself?

Is the answer a short sale? I’m thinking that maybe it’s a short sale.

Mr. T, you mentioned assume or assumption 4 times and the word let’s 3 times. That’s NLP, right? I’ve read tons about it and just can’t git enough of that NLP stuff!

Before I forgit, can you recommend any good NLP courses? I mean g-o-o-d, not like Tony Robbins uses but the kind I can apply to buy me some houses.

Thank You Sir!

Let’s be frank…I love it!

Re: Market down 10% - Posted by Gerald

Posted by Gerald on May 22, 2006 at 21:38:46:

Bill, great post! I agree… this is happening all over the nation right now, particularly here in Denver where I hang my hat. This scenario is both good and bad. Good because there are some great deals to be had…I get more good deals across my desk than I can possibly do. Bad when I buy a house, fix it up, put it on the market only to find out 3 other houses on the block have been short sales with a bank, and just brought all the comps on the block down by $20-50k. So we’ve switched to more of a fix-and-hold strategy to weather the storm. As Ed Garcia preaches, the only way for an investor to weather this storm is with cash flow. The rent-to-own exit strategy seems to be working for us right now in this type of environment, especially with nicer homes in nicer neighborhoods. I’d love to hear other people’s responses to this post. Bill, thanks for sharing this all too common scenario.

Re: Thanks. Sources (if you have time…) - Posted by Bob Smith

Posted by Bob Smith on May 24, 2006 at 21:20:30:

>Where can you rent a $400,000 home for $1500 per month?

Many parts of California. Rents there are completely out of scale with prices.

Re: Market down 10% - Posted by Hank FL

Posted by Hank FL on May 23, 2006 at 07:46:33:

It really takes guts to rip someone on the internet.

It’s people like you that keep me away from NGs for months at a time.

Re: Market down 10% - Posted by John Corey

Posted by John Corey on May 23, 2006 at 04:57:00:


A minor point so that people do not get confused.

What Bill is saying is very real in that the math adds up. What is not correct is your statement that “this is happening all over the country”. Many parts of the US have seen no real change in market conditions. These areas were not hot markets with rising prices. Hence there is no real motivation for a correction at this time. Some parts of the US are still climbing but those areas tended to see the rising price start much later in the cycle (Portland OR and some of the other cities on the 10 cities to watch thread).

Denver is clearly a market that has has some issues. Denver has had issues on a regular basis since the 1980’s (oil prices, dot com and telco up and downs).

You do raise a good point about the need to understand the market’s direction when pulling comps on past sales. The past might not be a good indicator of the future values.

John Corey

Re: Market down 10% - Posted by Norma L. Powers

Posted by Norma L. Powers on May 23, 2006 at 15:36:32:

Gosh Sir, I’m sorry if you felt my post was out of line. I read it agin to see what mite have set you off. If it was because I called Mr. Twyford Mr. T then I want you to know that’s just me and my way.

I mean golly, people call me Ms.P all the time since my husband, Melvin passed. Befor they’d say Mrs P. but not for many years.

I sincerly want to apologize to Mr. Twyford if I was disrepectfull in any way. I guess I was just so exited when I got to thinking about NLP and maybe I got a little tap happy with the computer. I really did git alot from his post and I’ll buy his course when I can afford it but I’m just getting started for now.
I hope this clears things up for you, sir.

Kidest regards,
Norma L. Powers

Re: Market down 10% - Posted by Bob Smith

Posted by Bob Smith on May 23, 2006 at 12:19:26:

Who is being ripped here? Norma’s post was pretty normal.

Re: Market down 10% - Posted by Gerald

Posted by Gerald on May 23, 2006 at 11:16:40:

John, thanks for the clarification - your points are well taken. However, Bill’s scenario IS definitely happening all over the country without a doubt…it is human nature for people to over-extend themselves. Many, many people across the country did just that a few years ago when basically anyone with a pulse could get a loan & we are now seeing the effects of this. So I truly believe this is happening in all parts of the country (although some markets are much less affected than others). I’m not suggesting there will be a nationwide pullback in prices. In fact, we are investing in several markets that I believe will have fantastic appreciation this year and next. I’m suggesting there are many opportunities in any real estate market as long as a person recognizes what is happening around them.

Re: Market down 10% - Posted by Hank FL

Posted by Hank FL on May 23, 2006 at 17:06:41:

How’s this for neuro-linguistic programming:

Re: Market down 10% - Posted by Hank FL

Posted by Hank FL on May 23, 2006 at 16:57:53:

Normal for an anonymous obnoxious flamer.

Re: Market down 10% - Posted by John Corey

Posted by John Corey on May 23, 2006 at 12:51:16:


My mistake. I thought you were saying that all across the US there are market corrections going on. More correctly you were saying that people all across the US over extend themselves. That has been true for a very long time. Most like as common as the number of people who join gyms and never go.

John Corey

I think Norma was tryin to be funny - Posted by Tampa Bay Mel

Posted by Tampa Bay Mel on May 24, 2006 at 08:37:20:

She was cute. You sir, were funny. LOL